Surprise: Obamacare medical device tax killing jobs in the industry

posted at 1:21 pm on July 30, 2012 by Mary Katharine Ham

An Indiana-based medical device company is canceling plans to build five new plants in the Midwest because of the hit it will take from the 2.3 percent excise tax imposed by Obamacare.

The new tax will cost Cook Medical Inc. between $20 million and $30 million a year, Pete Yonkman, executive director of Cook’s strategic business told the Indianapolis Business Journal, limiting the amount Cook can spend on new plants. It took $30 million to revamp an abandoned factory in Canton, Ill. last year that will eventually employ 300 people in this small town.

“We had hoped, as we get bigger, that that would be our model for expansion,” Yonkman told the Indianapolis Business Journal. “To take these small manufacturing facilities and bring them to these communities, that had been hard hit by jobs leaving because they work ethic is amazing and the people are really supportive and excited.”

A funny thing happened on the way to the passage of the health care bill. Congress had to pay for it. So, they cobbled together a couple billion here, wrung from taxing small-money business investments via crippling paperwork, and a couple billion there, taken from the wallets of tanning salon denizens. One of those taxes, forecasted to bring in $29 billion over 10 years, hits the medical device industry. Congress exempted such items as contacts and eyeglasses to prevent the tax hike from touching everyday purchases, but that doesn’t mean people won’t feel the cost in other ways, as Yonkman’s story illustrates.

The House voted to repeal the tax in June, 270-146, but the repeal has since stalled in the Senate, despite bipartisan support from the likes of Sen. Amy Klobuchar (D-Minn.), who is part of a Midwestern group of Democrats concerned about the job loss the tax may cause. Even liberal darling Elizabeth Warren, Democratic candidate for Senate in Massachusetts, backs repeal of the tax fearing the impact on a high number of medical device jobs in her home state.

Supporters of the law and the medical device tax argue that companies are exaggerating the toll the tax will take, and that more spending on health care in general will make up for their losses. But medical device companies argue theirs is an industry with many small companies shouldering large research-and-development budgets and competing for elite medical and scientific minds.

As a result, it took Massachusetts-based Abiomed 30 years to show a profit building specialized heart pumps. During that time, the company has grown from 10 to 440 employees, but the company risks being back in the red if the excise tax goes into effect Jan 1, 2013, as planned.

Abiomed reported about $1.5 million in profit on the $126 million in sales the company realized during fiscal 2012. Had the medical device tax been in effect then, the company would have had to turn in every penny of its profits, plus another $1.4 million or so.

“None of this was allocated three years ago when we created a strategic plan to become profitable,” CEO Mike Minogue told the House Committee on Small Business last week.

Minogue testified the amount Abiomed will pay for the excise tax is the equivalent of 15 percent of the company’s research and development budget, 10 percent of its employee head count, or almost double what it spends on health care for hundreds of employees.

“This tax will affect jobs. It will mix health care reform with tax policy and it will be extra detrimental to companies that are not yet profitable and need every dollar to survive,” he said.

Minogue also cited logistical concerns. The exact regulation, still not finalized, goes into effect Jan. 1 2013, and Abiomed’s books have to be closed and audited by March.

According to the medical-device industry’s national association, the field employs more than 400,000 Americans, and 70 percent of medical device companies are small businesses.

In February, Minnesota-based Medtronic said it may have to pass on its costs to consumers and cut back on its investments to pay the $60 million the tax will likely require.

The Minneapolis-based company estimates it will pay a tax of $40 million to $60 million in the 2013 fiscal year, based on the draft regulations currently available, Ellis said today in a telephone interview. Medtronic is trying to determine how much of the tax it can pass on to hospitals and other customers who purchase the company’s devices, he said.

“We’ve looked at this as basically one of the costs we’re going to have to cover as we put together our plans for fiscal year 2013 and as we put together our initiatives on a long-term basis,” Ellis said in a conference call with investors. “We’re going to have to make the tradeoffs and there’s probably going to be things that we can’t do as a result of that,” he said. “It means we won’t have as much to invest going forward.”

In November 2011, Michigan-based prosthetics manufacturer Stryker announced it will cut five percent of its global workforce to cope:

The reductions and restructuring “are being initiated to provide efficiencies and realign resources in advance of the new Medical Device Excise Tax scheduled to begin in 2013, as well as to allow for continued investment in strategic areas and drive growth despite the ongoing challenging economic environment and market slowdown in elective procedures,” the company said in a press release.”

In Tennessee, COO Bill Pittman of DeRoyal Industries succinctly described the problem for medical device companies:

“The medical device tax constitutes the largest cost increase DeRoyal has experienced in its 40-year history. We are working to mitigate this impact in a number of ways from both a revenue and cost perspective. Even in the face of this challenge we are doing everything within our power to preserve US jobs in this incredibly difficult economic environment.”

On the other side of the coin, several medical device companies have recently announced they’ll be adding employees, with the help of local and state tax incentives and credits. Wouldn’t it be more efficient if we just let everyone keep their own money for that?

All part of finding out what’s in it.

Minogue’s entire testimony is here, beginning at 10:00, with several questions for him at 42:00, 47:00, and 54:00.

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